Charity status for Education

Education is no more a charity, it is a big business. Despite earning huge income, most educational institutions enjoy tax exemption since they are registered as charitable trust.
 
Dear Finance Minister,
This is not regarding your budget. It is about a big tax avoidance scam that is not a scam simply because it has the sanction of the law of the land. You have also made it clear that tax evaders are being sent notices and they better declare incomes and pay tax. But what do we do about tax laws that allow tax avoidance or evasion it really does not matter. What matters is the country is being taken for a ride.
 
Most educational institutions are registered as “charitable trusts” in our country and because of this all their income is exempt from tax. What a noble idea indeed Sirji! May be this was fine at the time of independence. In that era there were mad people who were running educational institutes as a patriotic duty.
 
Things have changed beyond recognition since then. Now education is a big business. Many politicians have jumped on this bandwagon because it is a great vehicle to grab land free or at throw away prices all over the country. Many private institutes and even universities have sprung up which are covertly or overtly backed by politicians of all hues. This is an admirable quality amongst your clan, you fight with each other constantly, ostensibly for the good of the country and we the unfortunate citizens, but when a money making opportunity arises you close ranks.
 
As I understand that an institution is charitable only as long as it is doing charity of some kind. Educational institutes that charge huge fees and run professional courses and do this with a clear motive of profits, have no business to be called ‘charitable’. There are institutions that make crores of rupees by conducting entrance examinations and sale of prospectus. Is this charity?  Should this income not be taxed?
 
It would be interesting to see what percentage of fees collected by such institutes is spent on academics! In one institute I was told the ratio of payment to faculty to total income was about 2%! What happened to the balance? What charitable things were done? No student gets concession in fees, there are no freeships for poor students either. And best of all many of these institutes are big borrowers, borrowing money from banks to build buildings and to buy computers and books as required by AICTEA.
 
Now one hears some of these fantastic temples of education do not pay salaries to their employees on time. In Pune I have heard that Sinhgad Institute and Indira Institutes fall under this category. IIPM is a classic case, it does not pay salaries on time, and it even has courage to pay one year’s arrears to their visiting faculties by issuing11 post dated cheques to be deposited at the rate of one cheque per month! And unfortunately we have professors who are willing to go through this humiliation! The faculty and staff have no guts to protest as they fear loss of arrears plus loss of job. This is nothing but exploitation. And Mr Minister the majority of the staff in such institutes may be women! So forget your “Nirbhaya Fund”, how about protecting women who are getting exploited in this organized trade called education?
 
One reason for thriving of such institutions is the craze for a degree among Indians. That a degree increases the price of a bridegroom in marriage is a proven fact. As a matter of fact many of my students have accepted this and some have even said that we come all the way to Pune and spend so much money because it is an investment that delivers manifold returns once we sell ourselves in the marriage markets!
 
Sir, this is nothing but money making and profit making business. Schools also are no exception. A play group in a school for two-three year olds who go to school for three-four hours only charges Rs30,000 per year! On the other hand there are government-aided schools where fees are not revised for 25 or more years! Girls irrespective of their parents’ economic status are provided free education in Maharashtra. These girls are dropped to school in chauffer-driven high-end cars! Undergraduate aided colleges charge laughable fees. The students don’t attend classes in college which suits the professors who are overpaid after the Sixth Pay Commission bonanza with no evaluation of performance and guarantee of no punishment for non-performance! These same students attend private coaching classes and pay 10 times more fees to attend them! Many professors in aided colleges actually put in more hours as visiting faculty and were reportedly making more money than their salary. This is an open secret. They are actually not allowed to do this, but then who cares?
 
So Sir, a humble request education is no more a charity, it is a business that only needs political patronage, which is available in plenty at a cost of course. Please plug this loophole in your taxation policy. And please make sure that the tax is imposed retrospectively, something that you are so fond of! Here is perfect opportunity to do that, which may actually get you even many votes from those who have suffered for years, so it is even politically winnable in an election year!
 

Prof Anil Agashe

Truth About Zero percent Loans

“Zero percent finance schemes are quite popular with consumers, and companies use them in an efficient way to attract customers to make purchases, especially for consumer durables, during the festive season,” says Anil Sahgal, founder of financial advisory portal ‘i-save’. He says the festive season is a critical sales period for most consumer durable companies and the zero percent schemes play an important role in effective sales promotions. Since most customers do not understand the total cost of the scheme, they happily go for it as it seems like a genuine discount.

“You should, however, always remember that there is no free lunch in life. Similarly, zero interest is nothing but higher discounts that the company or manufacturer offers to the bank or the lender or the financier who in turn passes it on to the end buyer,” says Lokesh Nathany, head of sales & distribution, Motilal Oswal Asset Management.

These schemes are typically offered by finance companies or non-banking finance companies in conjunction with a manufacturer or dealer network. The schemes offer a ‘zero percent’ finance, where a customer typically pays for the financing cost in an indirect manner. The indirect cost will include, for example, paying a processing fee and a significant amount as advance EMIs in addition to the minimum cash down payment. The biggest cost, however, is forfeiting a cash discount which might be available on a cash purchase.

For instance, suppose Nand Gopal wants to buy an LCD TV for 36,000. At a major retail store, there is a cash discount of 2,000 available on the LCD. However, Gopal does not wish to pay the whole amount cash down. To avail of the scheme, Gopal will need to pay a processing fee of about 1,000 to the NBFC. He will also have to forfeit the cash discount of 2,000 since the discount is not available on a finance deal. Now, on a loan of twelve months, Gopal will have to pay four EMIs in advance, i.e., 36,000 / 12 X 4 = 12,000. So, effectively Gopal has got a loan for 24,000 only. His total cost of taking the loan was 3,000 (processing fee + forfeiting the cash discount). So for eight months, Gopal paid 3,000 on a loan of 24,000, paying an effective interest rate of 18.75% annualised.

So, buyers who can afford to buy with their own resources should not get lured by such schemes simply because they appear attractive.

However, if you must go in for a zero finance scheme, you need to take some precautions. For instance, “you must check the amount of processing fee to be paid besides checking the advance EMIs required. Also, compare the total cost of the zero finance scheme with the interest cost if any other loan was taken to finance your purchase. Customers must be aware of the details of the scheme and make an effort to compare these with other options for borrowing,” says Mr Sahgal.

Credit Card Procedure

Credit cards of late have a negative connotation, and are pronounced as complete no-no by many, because of the high interest rates that are charged on late payments/defaults. Don’t let this negativity cloud perception of the product. You would be surprised to know that, if you are judicious in using this product, you stand to benefit monetarily, and of course it eliminates the need for you to carry cash everywhere.

More often than not the problem is that people do not understand the product well and hence are not able to use it to their advantage.

The credit card company offers you a ‘free credit period’ of around 50-55 days. The misconception most people have is that this free credit period is from the date of purchase. It is actually from the date of billing. E.g. Mr. Anand billing cycle date is 28th of December to 27th of Jan and his credit free period is 50 days. If his purchase was on 22nd Jan, he would enjoy credit for 25 days. However if he made the same purchase on say 01st Jan, he would enjoy credit free period of 47 days. i.e the cycle starts from where your Billing Cycle STARTS.

So if you plan properly, you can enjoy maximum credit every month, which will help you manage your cash flows effectively, and will also help you earn the extra bit of interest on the cash that you have currently not spent on making the purchase.

In addition to the free credit period, every purchase made on your credit card, earns you reward points which when accumulated to a big amount can be exchanged for a range of items such as electrical appliances, flight tickets, home ware etc. These rewards will differ from company to company. Also credit card companies offer discounts, promotional offers with respect to shopping, entertainment etc. E.g If you buy petrol from a particular brand of petrol pumps, you get a small percentage of money credited back to your account after a certain number of days.

For the credit card to make money for you, two key things you need to keep in mind

Cost of Default:

The interest rate on defaults ranges from anywhere between 2%-3.5% per month. So in effect it is a whopping 24%-42% p.a. Also, the interest starts from the date of purchase and not the billing date i.e. you do not get any interest-free credit period and all future purchases also start attracting the interest charges from the date of purchase.

So use the credit card if and only if you’re sure of having the means to pay the bills in time. Also, don’t forget that your credit score will get impacted too which will impact your future borrowing.

Credit Limit:

Keep a tab on your credit limit. Overshooting your credit limit will also have dire consequences for you with respect to the interest charged and your credit score.

How do you ensure that your credit card makes money for you?

 Widen the usage of your credit card (small and big purchases): You might as well earn bonus points and interest on the cash that you have not currently used, to make the purchase. You can use the credit card to pay monthly rentals, grocery bills, utility bills, gift expenses, subscription expenses etc. So the cash that you have not used to make the purchase will earn interest for you or will be used for fulfilling other immediate needs. E.g. Maitali purchased an electrical appliance for Rs. 28,000 using the credit card she possessed.

The purchase was made such that she could enjoy a credit free period of 45 days. The cash that she would have used to purchase this appliance is now lying in her savings account which is earning her an interest of 3.5% p.a. So if she decides to pay the bill after enjoying 40 days of free credit, she earns an interest of Rs. 107 in her savings bank account. Not only that, she has also earned some reward points on the purchase. The other advantage of using the credit card is your payments are recorded which makes it easier for you to keep track of your expenses.

Appropriate use of bonus points:

Use the bonus points that have accumulated on buying necessities (house hold appliances, clothes, groceries etc.) rather than using it on using it on things (luxuries) that aren’t really important to you. Only if the bonus points are used practically, you are actually saving cash because had to now have the bonus points, you would have to anyways spend cash on buying the same.

Conclusion

Credit cards if used prudently will help you in managing your cash flow better, and at the same time, will provide you monetary benefits. That’s because you get interest free money for some period of time and you also earn reward/bonus points on the same.

But if you use it without deliberation, it can prove to be disastrous as interest rates charged on payment delays are very high. Also, your credit rating will take a beating, as banks report these things to the credit rating agencies, which in turn will include it as part of your credit report.

Don’t forget that credit score will not only determine whether you will get a loan but will also determine at what interest. Let not easy availability of credit and attractive rewards offered fool you into making impulsive purchases. It will prove to be rather costly.